Risk-Reward Ratio — The Math Behind Profitable Trading
Understand risk-reward ratios, R-multiples, and expectancy with simple math and real NSE trade examples. Learn why a 40% win rate can still be profitable.
You don't need to be right most of the time — you need to make more when you're right.
Most beginner traders are obsessed with their win rate. "I won 7 out of 10 trades this week!" Sounds great — until you learn that the 7 winners averaged ₹500 each and the 3 losers averaged ₹3,000 each. Net result: -₹5,500. A 70% win rate that loses money.
The missing piece is the risk-reward ratio (R:R). It tells you how much you stand to gain relative to how much you are risking. And it is, mathematically, more important than your win rate.
A trader with a 40% win rate and 1:3 risk-reward will always beat a trader with a 70% win rate and 1:0.5 risk-reward. Always. The math guarantees it.
What Is Risk-Reward Ratio?
Risk-reward ratio is the relationship between what you risk on a trade (your stop loss distance) and what you aim to gain (your target distance).
A 1:3 R:R means for every ₹1 you risk, you aim to make ₹3. This is the foundation of all profitable trading systems.
R-Multiple — A Better Way to Think About Trades
Instead of thinking in rupees, think in R-multiples. One "R" equals the amount you risked on the trade.
You risked ₹5,000 and made ₹15,000 → You made +3R
You risked ₹5,000 and lost ₹5,000 → You lost -1R
You risked ₹5,000 and lost ₹2,500 (partial SL) → You lost -0.5R
R-multiples let you compare trades across different instruments, lot sizes, and account sizes. A +3R trade on Nifty is directly comparable to a +3R trade on Reliance — because both represent 3× the initial risk.
Your goal as a trader is to maximize your average R-multiple over many trades. If your average is positive, you are profitable. Period.
The Expectancy Table — Win Rate × R:R
Expectancy tells you how much you expect to make (or lose) per trade, on average. The formula is:
Here are the numbers that matter. Expectancy per trade at various win rates and R:R ratios:
1:1 Risk-Reward
40% win rate: (0.40 × 1) - (0.60 × 1) = -0.20R per trade (losing system)
50% win rate: (0.50 × 1) - (0.50 × 1) = 0.00R per trade (breakeven minus fees)
60% win rate: (0.60 × 1) - (0.40 × 1) = +0.20R per trade (profitable)
1:2 Risk-Reward
40% win rate: (0.40 × 2) - (0.60 × 1) = +0.20R per trade (profitable!)
50% win rate: (0.50 × 2) - (0.50 × 1) = +0.50R per trade (solid)
60% win rate: (0.60 × 2) - (0.40 × 1) = +0.80R per trade (excellent)
1:3 Risk-Reward
30% win rate: (0.30 × 3) - (0.70 × 1) = +0.20R per trade (profitable at 30% accuracy!)
40% win rate: (0.40 × 3) - (0.60 × 1) = +0.60R per trade (strong)
50% win rate: (0.50 × 3) - (0.50 × 1) = +1.00R per trade (exceptional)
Look at the 1:3 R:R column. You can be wrong 70% of the time and still be profitable. This is why experienced traders say: "I don't care about being right. I care about making more when I am right."
Why 1:2 Minimum Is the Golden Rule
A minimum 1:2 R:R is the standard recommendation because it gives you a buffer for reality. In theory, you might aim for ₹30 profit with ₹10 risk. In practice:
Slippage eats into your actual entry/exit
Brokerage, STT, and GST reduce net profit
You might close early out of fear
The target might be hit by ₹0.50 and reverse, not giving you a fill
With 1:2 R:R, these real-world frictions are absorbed. Your effective R:R might drop to 1:1.6, which is still profitable at 50% win rate.
With 1:1 R:R, the same frictions push you into negative expectancy. That is why scalpers (who often trade at 1:1 or worse) need extremely high win rates — and most retail traders cannot maintain them.
Real NSE Trade Examples
Example 1 — Good R:R Trade (Tata Motors Swing)
Entry: ₹920 (pullback to 20 EMA support). SL: ₹895 (below recent swing low). Target: ₹995 (resistance level).
Risk: ₹25. Reward: ₹75. R:R = 1:3. Even if this trade only works 35% of the time, the math is positive.
Example 2 — Bad R:R Trade (SBI Scalp)
Entry: ₹780. SL: ₹770 (random 1.3% below entry). Target: ₹786 (₹6 above entry — "I'll take a quick ₹6").
Risk: ₹10. Reward: ₹6. R:R = 1:0.6. You need a 63% win rate just to break even. After fees, you need 67%+. This is not a trade — it is a lottery ticket.
Example 3 — Nifty Options R:R
Bought Nifty 23,500 CE at ₹180. SL: ₹120 (₹60 risk). Target: ₹360 (₹180 reward).
Risk: ₹60 × 25 (lot size) = ₹1,500 per lot. Reward: ₹180 × 25 = ₹4,500 per lot. R:R = 1:3. Two winners out of five attempts and you are profitable.
Common R:R Mistakes
Trading 1:1 habitually — You need 55%+ win rate after fees. Most traders don't have it.
No target — "I'll see where it goes" means you have infinite reward in theory but usually book small profits and hold big losses.
Moving your target — You entered with a 1:2 R:R but panicked and booked at 1:0.8. Over time, this turns a winning strategy into a losing one.
Ignoring R:R for "conviction" — "I'm really sure about this one, so 1:0.5 is fine." No it isn't. Math doesn't care about your feelings.
How to Find High R:R Setups
High R:R trades share common characteristics:
Trade near [support/resistance](/learn/support-resistance) — When you buy near support, your SL is tight (just below support) but your target can be the next resistance. This naturally creates high R:R.
[Breakout trades](/learn/chart-patterns) — A clean breakout with volume gives a small SL (just below the breakout level) and a large target (measured move).
Pullbacks in trends — Entering on a pullback to a moving average in a strong trend gives tight risk (below the MA) and large reward (trend continuation).
[Fibonacci retracement](/learn/fibonacci-retracement) entries — Entering at the 61.8% retracement with SL below 78.6% gives excellent R:R if the trend resumes.
Tracking Your Actual R:R with ArthaLearn
Your planned R:R and your actual R:R are often different. ArthaLearn's trading journal tracks both:
Planned R:R — What you aimed for at entry
Actual R:R — What you actually achieved
R:R erosion — The gap between planned and actual, which shows how much profit you're leaving on the table
Average R per trade — Your single most important performance metric
If your planned R:R is 1:2 but your actual is 1:1.2, you have an execution problem — not a strategy problem. ArthaLearn's AI can pinpoint whether it's early exits, late entries, or stop loss widening that's eroding your R.
The Bottom Line
Risk-reward ratio is the foundation of profitable trading. It determines whether your strategy can make money — regardless of how good your entries are. The rule is simple: minimum 1:2 R:R on every trade, no exceptions.
Combine this with proper position sizing, disciplined stop losses, and a written trading plan, and you have a system that can survive thousands of trades — which is how long it takes for your edge to compound.
Track your R-multiples with ArthaLearn and see your actual expectancy after 50+ trades. The numbers will tell you exactly what needs fixing.
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